- When Two Become One: Foreign Capital and Household Credit Expansion (with Björn Richter)
Abstract: Rapid credit expansions predict lower output growth and banking crises, but does it matter who is financing them? To answer this question, we identify the ultimate counterparties financing credit expansions in a novel data set covering 33 countries. We find that foreign-financed household credit expansions predict lower future GDP growth and higher risk of crises, but domestically financed credit expansions do not. We link these patterns to depressed domestic demand driven by higher debt service payments to foreigners, reversals in foreign financing, and confirm the findings using an instrumental variable based on lending dynamics in the international banking network.
- Golden Fetters or Credit Boom Gone Bust? A Reassessment of Capital Flows in the Interwar Period
Revise and Resubmit at the Economic Journal
Abstract: This paper uses newly digitized Balance of Payments data for 33 countries to study international capital flows and their economic implications during the interwar period. I document the boom-bust pattern in capital flows centered on the Great Depression and show that gross foreign credit is the decisive link between capital flows, reduced output growth, financial crises, and post-crisis recession severity. Crucially, this effect surpasses that of net foreign borrowing and domestic credit. The Gold Standard played a key role by exposing countries to foreign capital through global financial integration, while simultaneously restricting their ability to respond to surging inflows. Using an instrumental variable based on bilateral exposure to the US, foreign capital supply shocks are identified as an important driver of these dynamics.
Abstract: We compile a new dataset on government liabilities by instrument for 33 advanced economies and document that a substantial share of government debt consists of loans rather than bonds. To study governments' loan-bond portfolio choice, we exploit high-frequency variation in bond yields around sovereign credit rating announcements, which shift the demand for government liabilities. Our analysis yields three main findings. First, increasing bond yields cause the government to substitute from bond to loan-based borrowing. Second, this substitution is mirrored by foreign creditors, who reduce their direct bond holdings and increasingly provide funding indirectly through domestic bank loans. Third, this shift toward domestic bank loans is associated with elevated levels of financial distress. Finally, we discuss how these findings can be rationalized when repatriating government debt through domestic banks reduces sovereign default risk. This mitigates the initial bond yield increase, albeit at the expense of higher bank balance sheet risk.
- Financial Deregulation and Fertility Decisions: The Unintended Consequences of Banking Legislation
(with Julian Soriano-Harris)
Abstract: Financial deregulation has important implications beyond the realm of finance, and these effects differ by race. In this paper we use staggered difference-in-differences to link state level banking deregulation during the 1980s in the United States to two demographic outcomes: mothers' age at first childbirth and fertility rates. We find that after deregulation the average age at which women become mothers for the first time increases, and that this effect is stronger for the non-white population. The average effect on total fertility is positive over short horizons, but reverts back to zero over longer horizons. For the non-white sample, however, this reversion outweighs the previous increase, resulting in a net fertility decrease. We argue that the main channel for these effects is the boom in house prices induced by deregulation. On the one hand, this boom delays fertility by prolonging the period of saving before a home purchase, on the other, it reflects a wealth gain for home owning families, linked to increased fertility. Given the stark discrepancy in financial constraints and home ownership rates between the white and non-white population in the US, the relative strength of the channels differs, resulting in significant heterogeneity in outcomes.
Abstract: This paper combines data on international capital flows with domestic bank balance sheets to study the link between global and local financial conditions during the interwar period. Using a sample of 27 countries, it shows that during the Roaring Twenties, international capital flows were closely associated with domestic bank balance sheet expansion and contraction. This relationship weakened during the Great Depression, as countries sought to isolate their financial systems. Using Gold Standard exit as an indicator for the decision to decouple from the global financial system, we find (i) that capital flow volumes declined significantly thereafter, and (ii) that for any given level of capital flows, the pass-through to domestic banking systems decreased. We quantify these findings into a new country-level index for de facto financial openness, and show that higher openness related to lower growth during the boom and bust phase of the interwar business cycle, but to higher growth during the following recovery.
- Bilateral International Liabilities (with Björn Richter and Yuhan Luo)
- Reviving Lost Voices: Economic Expectations from Historical Diaries (with Lukas Hack)